Debt, Malawi’s major fiscal challenge—World Bank

The World Bank (WB) has said the high level of government expenditure related to resources in tackling public debt remains one of Malawi’s major fiscal challenges.

Figures from the bank indicate that the country’s public sector expenditures are relatively high, at more than 35 percent of gross domestic product (GDP).

Expenditures relative to GDP and relative to revenues and grants have grown over the years as the government has taken on increasingly large expenditures for human development and agricultural subsidies, according to the bank.

“This high level of government expenditure without commensurate benefits places a heavy burden on the private sector. The high level of government consumption in excess of domestic resources is financed by domestic borrowing, aid, and implicit sources of public finance.

“Not only is expenditure high, but those resources are also not necessarily used in the most efficient or effective way. While Malawi has achieved significant improvements in health outcomes, less can be said about the use of resources for educational and agricultural subsidies,” said the bank in its Country Economic Memorandum (CEM) published last week.

According to the bank, a related challenge has been the degree of “elite capture” of major public expenditure programmes, which often reduces the effectiveness of public spending and makes reforming the use of expenditures more difficult.

“Elite capture includes recurring pressures to grow both the size of the public sector and the level of public sector compensation as well as the very high costs of civil service retrenchment, along with the high costs of nonwage benefits, allowances, and travel [especially at senior grades]. In addition, public procurement in major programmes such as fertiliser as well as in goods and services contracts and infrastructure has been a major challenge and the source of several grand corruption cases in recent years,” memorandum in part.

According to the 2017/18 draft financial statement, as at December 2016, total public debt amounted to K2 trillion, accounting for 53.5 percent of the GDP of which $1.7896 was foreign debt and K806.2 billion or 20.7 percent of GDP was domestic debt.

Ministry of Finance, Economic Planning and Development spokesperson Davis Sado is on record as having said given the limited size of the resource envelope, government will continue to borrow externally for development purposes, as long as the external debt portfolio is maintained within sustainable level that is 30 per cent of GDP in present value terms.

International Monetary Fund (IMF) resident representative Jack Ree argues that a rapid increase in debt is clearly not a good development as about 15 percent of the government budget is used for interest payment alone.

“To begin with, a country cannot keep on borrowing money to consume more than what it can afford. That just cannot last. And time will come when you can borrow no more and need to tighten your belt drastically. Rise in debt levels also makes a country more vulnerable to external shocks

Borrowing for public investments may be more sustainable, but there is also a danger that it fails to bring the intended outcome. There are many reasons for this, including poor planning or governance,” he said n